Patrick: Raise income tax, cut sales tax

BOSTON -- Gov. Deval Patrick asked the Legislature on Wednesday to support a net increase of $1.9 billion in state taxes to support major new spending on transportation and education.

Patrick used his annual State of the State address to propose hiking the state income tax from 5.25 percent to 6.25 percent, while doubling the personal exemption for all taxpayers and eliminating dozens of itemized deductions.

At the same time, he called for reducing the state sales tax from the current 6.25 percent to 4.5 percent.

The governor said the changes would make the state's tax code fairer, because the sales tax is generally considered more regressive than the income tax. He also said the changes would keep Massachusetts competitive with most neighboring states.

"There is no good time to raise taxes. I know how tough times have been on the people and families of the commonwealth," Patrick said, as the House chamber fell silent.

"I would not ask if I did not believe in my heart that investing meaningfully today in education and transportation will significantly improve our economic tomorrows. But because we all have a stake in that future, we should all contribute to paying for it."

Administration officials said the income tax changes would raise $2.8 billion in the next fiscal year starting July 1, while closing some business tax loopholes -- also part of the plan -- would bring in $194 million. The increases would be partially offset by the $1.1 billion reduction in the sales tax.

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The meals tax, paid by restaurant diners, would also fall to 4.5 percent.

Under his plan, the income tax hike, Patrick said, would go to support education initiatives, while in the future all proceeds from the sales tax would go to a public-works fund that will support transportation, school construction and other public infrastructure. Sales tax proceeds would be off limits to any other state programs.

Currently, 20 percent of sales tax proceeds are dedicated to public transit.

A report from the state board of transportation received by Patrick earlier this week called for an additional $1 billion a year to maintain and modernize the state's transportation system. The report detailed a chronically underfunded system that remains burdened with debt from the Big Dig highway project and other past commitments.

Patrick has also outlined an ambitious plan this week to expand access to education for students from birth through high school.

The plan would cost $550 million in its first year, increasing to nearly $1 billion annually over the next four years. Among other things, it would provide universal access to early education from birth through age 5, allow for extended school days in high-need school districts and help public colleges more affordable for low- and middle-income students.

Legislative leaders were cautious in their response to the speech, saying the plans would require extensive review by lawmakers.

Senate President Therese Murray applauded Patrick on his education and transportation initiatives while adding, "the devil's in the details."

House Speaker Robert Deleo said Patrick "has given us a lot of food for thought."

The state's current income tax rate ranks 30th highest among states that levy an income tax, according to the most recent analysis by the Washington-based Tax Foundation. But because Massachusetts is a wealthier state, it has one of the nation's highest per-capita income tax payments.

Massachusetts voters previously approved a ballot question in 2000 to gradually lower the income tax rate from 5.95 percent to 5 percent.

In 2002, the Legislature froze the rate at 5.3 percent, but also added a mechanism that would allow the rate to fall in increments of .05 percent if growth in annual revenues meets certain benchmarks.

"Clearly the changes make the state's tax system more progressive, but it is a large increase to impose on those who make the decisions whether to invest in Massachusetts, especially in a fragile economic environment," said Michael Widmer, president of the business-backed Massachusetts Taxpayers Foundation.

Patrick, a Democrat who has ruled out seeking a third term in 2014, said he encouraged debate over his tax proposals, "But this time, instead of sinking in the same old slogans, let's have a serious, fact-based debate," he said.

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